Increasing UK Pension Scheme Investments in Private Markets -opportunities and challenges for private capital providers

In early May 2025 the Mansion House II Accord (the Accord) revealed that seventeen of the largest workplace pension providers in the UK have pledged to allocate at least 10% of their defined contribution (DC) default funds to private markets by 2030, with 5% specifically earmarked for UK investments.  Further, in its response yesterday to industry consultation on “Unlocking the UK pensions market for growth” (the Consultation Response), the Government confirmed its support for various measures to encourage pension schemes to shift their pension investment strategy to the UK market generally, and to UK infrastructure and growth assets more specifically. These measures will be set out in the soon to be published Pension Schemes Bill.  The Accord is not legally binding, but rather a voluntary code aiming to increase investment in unlisted equity.  However, the Government has now confirmed that the Pension Schemes Bill will include a reserve power for the Government to take action to mandate certain levels of investment in private capital markets in the UK, if the sea change they are pressing for does not happen voluntarily.

Private market investments—such as private equity, infrastructure, and venture capital— can potentially result in higher returns and portfolio diversification for pension schemes, and provide long-term growth and inflation protection. However, this transition may be easier said than done since in practice pension schemes do face significant issues in allocating a higher proportion of investments to private markets.  The Accord itself specifically makes the commitment conditional on Government action to resolve some of these challenges, albeit it appears that only certain of these challenges will be addressed by the Pension Schemes Bill.  However, with workplace pension funds in the UK holding over £2 trillion in assets, there are clear opportunities for private capital providers and intermediaries who can identify and introduce solutions to overcome some of the challenges described below.

Challenges

• Building the Right Expertise 

Private market investments typically involve specialized fund structures, and long-term capital commitments with limited interim liquidity opportunities. They require specialized knowledge in various areas including due diligence, valuation, and risk management, and UK pension funds which have not previously focused on private market investments will likely need to build up their internal expertise in this area to be able to access opportunities effectively. 

• High Costs

Significant upfront costs and higher management fees will make assessing the value for money proposition more challenging for many schemes, even if the revised VfM framework contemplated in the Consultation Response and the Pensions Investment Review Final Report (the Investment Report) published yesterday does succeed in moving away from simply comparing baseline costs to a more sophisticated assessment of value proposition.

• Illiquidity and Governance Challenges

The illiquid nature of these investments poses a challenge for pension providers who must ensure sufficient liquidity to meet benefits and member withdrawals on a day-to-day basis, and to comply with their requirement to hold assets that are predominantly traded on regulated markets. Additionally, governance structures would need to evolve to accommodate these long-term investment strategies, which differ from traditional pension fund management mandates.

• Limited Transparency

The lack of standardized reporting requirements can make it harder for investors to assess performance, risks, and governance structures of private market investments.  Defined contribution pension schemes in particular may be constrained by the need to be able to provide reliable asset valuations to members in close to real time.

• Scale and Accessibility Issues

Large institutional investors often dominate private equity and infrastructure deals, leaving smaller funds with limited access to top-tier investments. The Government aims to address this issue by encouraging collaboration between pension providers and alternative investment platforms. The drive from the Government, the FCA, and the Pensions Regulator to increase market consolidation will also have an impact. The Government has now confirmed in the Consultation Response that multi-employer DC schemes will need to target assets under management of £25bn – the level where they are expected to have the requisite scale to seriously pursue private market investments - by 2030 or 2035.

• Market and Economic Risks

Private investments can be more sensitive to economic circumstances. For example, infrastructure projects and private equity investments can disproportionately suffer if interest rates rise or if economic conditions deteriorate, affecting expected returns. It is conceivable that an increased flow of funds from UK pension schemes into private markets to meet the Government targets could also have an inflationary effect on asset prices, impacting the return potential of such investments. 

Options for pension schemes

Pending further consolidation in the market, only the largest UK pension schemes are likely to have the scale and resources to follow the example of the large Australian and Canadian pension funds and invest directly in infrastructure and other private market assets.  For the majority of these schemes, the main options we see are:

• Partnership arrangements with specialized investment managers to gain expertise and access to attractive investment opportunities.
• Collaboration with other similarly situated schemes to be able to achieve sufficient combined weight to pursue specific opportunities.
• Investment in collective investment vehicles, including existing UK investment and long term asset funds, where their assets will be pooled with those of other schemes and invested by the fund manager.  These arrangements could also help schemes comply with their statutory obligations on diversification, and potentially, if redemptions can be matched with new inflows, relieve some of the liquidity issues described above.  However, pooling across unconnected schemes will also introduce its own risks and issues, particularly if economic conditions deteriorate.    
• At the larger end of the scale schemes may be able to negotiate special terms for their participation in a  fund or collective vehicle, to manage their risks and meet their specific priorities. 

Over time UK pension funds may become a reliable source of investor money for private capital providers. While we do not underestimate the amount of work still to be done on several fronts to make sure the legal and regulatory framework is fit for purpose, we welcome the potential opportunities given the size of the prize.